19.1

Question 1

Which of the following statements concerning prospective financial statements is true?

Answer 1

Any type of prospective financial statements would normally be appropriate for limited use.

Limited use of PFSs means use by the responsible party and those with whom that party is negotiating directly, e.g., in a submission to a regulatory body or in negotiations for a bank loan. These third parties can communicate directly with the responsible party. Consequently, any PFSs useful in the circumstances are appropriate for limited use.

Question 2

An accountant has been engaged to examine pro forma adjustments that show the effects on previously audited historical financial statements due to a proposed disposition of a significant portion of an entity’s business. Other than the procedures previously applied to the historical financial statements, the accountant is required to

Reevaluate the entity’s internal control over financial reporting:
Determine that the computations of the pro forma adjustments are mathematically correct:

Answer 2

No
Yes

In an examination of PFFI, the practitioner’s additional procedures include (1) understanding the underlying transaction or event; (2) discussing the assumptions about the transaction or event with management; (3) evaluating whether adjustments are consistent with each other and the data and are included for all significant effects; (4) gathering sufficient evidence to support the adjustments; (5) evaluating whether the assumptions are sufficiently, clearly, and comprehensively presented; (6) determining that computations are correct and that the pro forma column properly reflects their application to the historical statements; (7) obtaining written management representations; and (8) evaluating the PFFI to determine whether certain matters (the transaction or event, assumptions, adjustments, and uncertainties) have been properly described and the sources of the historical information have been properly identified. Moreover, in a business combination, the practitioner must obtain a sufficient understanding of each part of the combined entity. However, no evaluation of internal control beyond that done in the engagement is performed with respect to the historical statements.

Question 3

In which of the following situations will a practitioner disclaim an opinion on an examination of prospective financial statements?

Answer 3

The practitioner was not able to perform certain procedures deemed necessary.

If the auditor becomes aware of a management-imposed scope limitation after accepting the engagement, a disclaimer of opinion should be issued.

Question 4

A CPA is required to comply with the provisions of Statements on Standards for Attestation Engagements (SSAEs) when engaged to

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Answer 4

Review management’s discussion and analysis (MD&A) prepared pursuant to rules and regulations adopted by the SEC.

An attestation engagement is one in which the practitioner is engaged to issue or does issue an examination, review, or an agreed-upon procedures report on subject matter, or an assertion about the subject matter, that is the responsibility of another party. The guidance in the SSAEs applies to (1) all attestation engagements (AT-C 105), (2) examinations (AT-C 205), (3) reviews (AT-C 210), (4) agreed-upon procedures engagements (AT-C 215), (5) prospective financial information (AT-C 305), (6) pro forma information (AT-C 310), (7) compliance attestation (AT-C 315), (8) reporting on controls at a service organization (AT-C 320), and (9) management’s discussion and analysis (AT-C 395). But a review report cannot be filed with the SEC.

Question 5

Which of the following professional services would be considered an attestation engagement?

Answer 5

Examining the financial statements for one year in the future based on client expectations and predictions.

Statements on Standards for Attestation Engagements (SSAEs) apply generally to performance of an examination, review, or agreed-upon procedures attestation engagement to report on subject matter, or an assertion about it, that is the responsibility of another party. The subject matter may be prospective financial statements (PFSs). PFSs include financial forecasts and projections. A forecast is based on the responsible party’s assumptions reflecting the conditions it expects to exist and the course of action it expects to take. Furthermore, a review is not permitted to be performed with regard to a forecast or projection. However, a practitioner may examine or apply agreed-upon procedures to PFSs.

Question 6

A qualified opinion in an attestation examination engagement most likely is expressed when

Answer 6

Misstatements are material but not pervasive to the subject matter.

A qualified opinion is expressed when, having collected sufficient appropriate evidence, the practitioner concludes that misstatements, individually or in the aggregate, are material, but not pervasive, to the subject matter.

Question 7

In an attestation review engagement, the objectives of the practitioner are to

Answer 7

Obtain limited assurance about whether any material modifications should be made to the subject matter in order for it be in accordance with the criteria.

The objective of a review is to provide limited assurance about whether the subject matter requires material modifications.

Question 8

According to the AICPA Statements on Standards for Attestation Engagements, a public accounting firm should establish quality control policies to provide assurance about which of the following matters related to agreed-upon procedures engagements?

Answer 8

The practitioner is independent from the client and other specified parties.

A practitioner must be independent of the client and other specified parties to perform an agreed-upon procedures engagement. The practitioner assists specified parties in evaluating subject matter or an assertion as a result of the needs of the specified parties. The practitioner’s services are obtained because the specified parties require that findings be independently derived.

Question 9

A financial forecast consists of prospective financial statements that present an entity’s expected financial position, results of operations, and cash flows. A forecast

Answer 9

Is based on assumptions reflecting conditions expected to exist and courses of action expected to be taken.

According to AT-C 305, a financial forecast consists of prospective financial statements that present, to the best of the responsible party’s knowledge and belief, an entity’s expected financial position, results of operations, and cash flows. A forecast is based on the responsible party’s assumptions reflecting conditions it expects to exist and the course of action it expects to take.

Question 10

A review typically consists of inquiries and analytical procedures. An attestation review may not rely heavily on analytical procedures because the subject matter may be

Answer 10

Less qualitative.

Use of analytical procedures is less likely because the subject matter may be qualitative, not quantitative. The practitioner then should perform other procedures, in addition to inquiries that provide equivalent review evidence.

Question 11

Limited assurance may be expressed when a practitioner is requested to apply agreed-upon procedures to specified

Elements of a financial statement:
Accounts of a financial statement:

Answer 11

No
No

The practitioner does not express an opinion or limited assurance when engaged to apply agreed-upon procedures. Instead, the practitioner’s report on agreed-upon procedures should be in the form of procedures and findings.

Question 12

When a practitioner examines projected financial statements, the report should include a separate paragraph that

Answer 12

Indicates that the prospective results may not be achieved.

When the presentation is a forecast or projection, the practitioner’s report should include a separate paragraph stating that differences between (1) forecasted or projected results and (2) actual results frequently occur. Events and circumstances often are not as expected, and differences may be material.

Question 13

The practitioner’s report on an examination of pro forma financial information (PFFI)

Answer 13

May state an unmodified, qualified, or adverse opinion.

The report should include an opinion on whether (1) management’s assumptions provide a reasonable basis for the significant effects attributable to the transaction or event, (2) the pro forma adjustments give appropriate effect to the assumptions, and (3) the pro forma amounts reflect the proper application of those adjustments to the historical data. Scope limitations, uncertainties, reservations about the assumptions or the presentation (including inadequate disclosure), and other matters may lead to modification of the opinion or a disclaimer.

Question 14

A practitioner may perform an agreed-upon procedures engagement on prospective financial statements provided that which of the following is met?

Answer 14

The prospective financial statements include a summary of significant assumptions.

A practitioner may accept an engagement to apply agreed-upon procedures to PFSs if the practitioner is independent and (1) the specified parties agree to the procedures and take responsibility for their sufficiency, (2) an alert restricts report use to specified parties, and (3) the statements include a summary of significant assumptions.

Question 15

Accepting an engagement to examine an entity’s financial projection most likely would be appropriate if the projection were to be distributed to

Answer 15

A bank with which the entity is negotiating for a loan.

A projection is based on one or more hypothetical assumptions and, therefore, should be considered for limited use only. Limited use of PFSs means use by the responsible party and those with whom that party is negotiating directly. Examples of appropriate use include negotiations for a bank loan and submission to a regulatory body. A projection is inappropriate for distribution to those who will not be negotiating directly with the responsible party.

Question 16

A practitioner accepted an engagement to examine the entity’s compliance with a contractual agreement. The practitioner should perform the following:

I. Plan the engagement.
II. Perform procedures to provide reasonable assurance of detecting material noncompliance.
III. Consider subsequent events.
IV. Create a report containing limited assurance whether the entity is in compliance.

Answer 16

I, II, III.

The following summarizes the practitioner’s procedures in a compliance attestation examination engagement:

1. Obtain an understanding of the specified compliance requirements.
2. Obtain an understanding of the relevant portions of internal control over compliance to plan the engagement and to assess control risk.
3. Obtain a written representation letter from the responsible party.
4. Form an opinion.

Question 17

In an engagement to examine management’s discussion and analysis (MD&A), which of the following best defines control risk?

Answer 17

The risk that material misstatements in the MD&A presentation will not be prevented in a timely manner.

Control risk is the risk that material misstatements that could occur in an assertion included in MD&A will not be prevented or detected on a timely basis by the entity’s internal control (AT-C 395).

Question 18

An attestation engagement addresses subject matter that is the responsibility of someone other than the practitioner. The subject matter of an attestation engagement is best defined as

Answer 18

What is measured or evaluated against criteria.

Subject matter is what is measured or evaluated against criteria. Subject matter may have many forms, for example, historical or prospective performance (e.g., performance measures) or physical characteristics (e.g., square footage of facilities).

Question 19

A nonissuer engaged a practitioner to perform agreed-upon procedures on specified matters. The date of the practitioner’s report would ordinarily be determined by the occurrence of which of the following events?

Answer 19

The completion of the agreed-upon procedures.

The date of the report is no earlier than when the practitioner completed the agreed-upon engagement procedures and determined the findings. Completion includes (1) review of documentation, (2) preparation of the written presentation of the subject matter (if applicable), and (3) the receipt of the responsible party’s written assertion (unless that party has refused).

Question 20

Practitioner was engaged by a group of pension recipients to apply agreed-upon procedures to financial data supplied by Pension regarding Pension’s written assertion about its compliance with contractual requirements to pay benefits. The report on these agreed-upon procedures should contain a(n)

Answer 20

List of the procedures performed (or reference to them) and Practitioner’s findings.

The practitioner’s report should be in the form of procedures and findings but should not provide any assurance about whether the entity is in compliance or whether the responsible party’s assertion is fairly stated (AT-C 315).